The History of Credit Cards
How ancient promises of payment became modern digital transactions.
If you’ve paid for a latte or plane ticket with one of those shiny, new metal credit cards, here’s something you might not know: Some of the very first credit cards were also made of metal. However, those early cards were clunky and not widely accepted. Today you can make quick payments with credit cards almost anywhere, and not think twice—that’s part of its modern design. But as with most things we take for granted, there’s a long history behind those cards you carry.
Let’s walk through the history of credit cards to better appreciate this convenient, and even rewarding, form of payment.
Early Forms of Credit
People have engaged in credit-like transactions for thousands of years. For example, merchants would give farmers seeds so long as repayment would come following the harvest.
One of the earliest written examples of a credit system can be found in the Code of Hammurabi, a set of laws named after the ruler of Babylon from 1792 to 1750 B.C. This early credit system established rules for loaning and paying back money, and how interest could be charged, too.
Jump forward to the late 1800s when consumers and merchants exchanged goods using the idea of credit, exchanging what were called credit coins and papers as temporary currency. This started among small merchants, but the idea of credit payments quickly spread to other industries.
Around 1885, loyal customers of hotels and department stores received what can be considered early paper store credit cards. The credit lines were typically only for one location, but sometimes accepted by competing merchants, too.
Metal Money: Coins, Cards and Charga-Plates
In 1914 Western Union gave metal plates to select customers that allowed them to defer payment until a later date. Oil companies followed suit in the next decade by creating similar courtesy cards that could finance gas and repair services at their stations.
Next came the Charga-Plate, a metal card developed as early as 1928 that fit in wallets, was personalized with embossed cardholder’s information, almost like a military dog tag, and had paper on the back for the cardholder’s signature. The embossed card helped sales clerks quickly make imprints of the details for processing. These cards were issued during the 1930s through the 1950s primarily by larger merchants for use in their store networks.
The First Bank Card: Charg-It
The next credit card milestone came in 1946 when the first bank card system, called “Charg-It” was introduced by Brooklyn, New York banker John Biggins. The Charg-It model worked very similar to modern credit cards: A customer would use the card to pay a retailer, the issuing bank would reimburse the retailer, and then sought payment from the customer.
At this point, Charg-It cards only worked at stores located very close to the card’s issuing bank. These early credit cards were not national payment tools yet.
Diners Club Card Is Created
In 1949, a man named Frank McNamara was dining at Major’s Cabin Grill in New York City and realized his wallet was sitting at home. He resolved the situation, but it was something he never wanted to happen again. His experience, dubbed “The First Supper” by Diners Club, inspired McNamara and his business partner Ralph Schneider to release the first cardboard Diners Club Card in 1950. It was a charge card intended for consumers who wanted to pay back their travel and entertainment purchases later. It was the first card to be accepted by multiple merchants outside a single geographic area.
The Diners Club Card exploded in popularity and by 1951, only a year after launch, Diners Club had more than 42,000 members, and card acceptance spread throughout major U.S. cities.
More Card Issuers and Networks Form
Following the success of Diners Club, other banks and financial players moved to get in on the action.
American Express started their own credit program in 1958. Like the original Diners Club Card, it was first a charge card intended to fund travel and entertainment expenses and bills were due in full at the end of each month. In 1959, American Express introduced the first card made of plastic. The issuing bank then launched their corporate credit card program for commercial customers in 1966.
In 1958 Bank of America introduced the first true general-purpose credit card, BankAmericard, that was most similar to the credit cards we use today. It was initially made of paper, but soon became plastic. It had a $300 spending limit and cardholders could carry balances month-to-month, for a fee. It could be accepted by any merchants willing to take it.
Until this point, banking and financial services in the U.S. were largely conducted locally, not nationally. To better compete with the growing credit card industry, in 1966 Bank of America began licensing its cards to be used by other banks, expanding its reach around the nation. To strengthen the network, by 1970 Bank of America joined a group of banks to form National BankAmericard, Inc. which was later renamed Visa in 1976.
In 1966, a small group of East-coast banks formed the Interbank Card Association (ICA) to compete with California-based BankAmericard. ICA’s answer to the BankAmericard was a card program called “Master Charge.” The organization began revolutionizing the payment authorization process and in 1973 established a central computer network that connected merchants with card-issuing banks. In 1979, Master Charge was renamed MasterCard.
The card issuer and network now recognized as Discover was started by Dean Witter Financial Services Group, Inc, a subsidiary of Sears, Roebuck and Co. in the late 1980s. Early Discover card purchases were made by Sears employees at stores in Atlanta and San Diego in 1985 to test the system. The Discover credit card then launched publicly via a national TV commercial during Super Bowl XX. Decades later in 2008, Discover acquired Diners Club International to expand their card reach globally.
Invention of the Magnetic Stripe
You know that black stripe on the back of your cards? It was put on a plastic card by IBM engineer Forrest Parry in the early 1960s. Parry’s magnetized tape first held details for CIA identity cards and became a simple and inexpensive way to store account information for payment cards and point-of-sale terminals, too.
Until the introduction of the magnetic stripe (also known as “mag stripes”), credit card transactions were more physical than digital, so this was an historic step forward. Payment transactions could be computerized instead of dependant on manual processing.
Magnetic stripes were adopted as a U.S. standard for payment cards in 1969 and as an international standard two years later.
Early Industry Regulations
While the credit card industry rapidly expanded in the 1960s, some fundamental issues still needed to be addressed. For example, card issuers had different ways of calculating interest rates with little consistency or transparency. Fraudulent charges were a problem and women typically couldn’t qualify for a card without a male co-signer. Card terms and conditions? They didn’t really exist.
Lawmakers stepped in starting in 1968 by passing the Truth in Lending Act, which would eventually be part of a larger Consumer Credit Protection Act. The Truth in Lending Act standardized how banks and card issuers calculated annual percentage rates (APRs).
More laws were passed in the 1970s and became the groundwork for regulations that help protect credit card holders today.
- The Fair Credit Reporting Act of 1970: This law helps ensure the information gathered by credit reporting agencies is fair and accurate.
- The Unsolicited Credit Card Act of 1970: Prohibits issuers from sending active cards to customers who haven’t requested them.
- The Fair Credit Billing Act of 1974: Curbs abusive billing practices and permits consumers to dispute billing errors by following a get of guidelines.
- The Equal Credit Opportunity Act of 1974: Lenders must make credit available to all credit-worthy applicants and cannot discriminate based on gender, race, marital status, national origin, or religion.
- The Fair Debt Collection Practices Act of 1977: Debt collection agencies are banned from practicing predatory debt collection, such as using threats or harassment.
Rewards Programs Gain Popularity
In 1984 Diners Club introduced its “Club Rewards” program and in 1987 Citibank established a credit card reward program with American Airlines, allowing customers to earn free or reduced airfare by using their card.
Throughout the 1990s, reward programs gained momentum and card issuers began enticing customers with sign-up bonuses, cash back perks, and co-branded deals which made credit cards even more popular than before. For example, American Express first launched it’s Membership Rewards program in 1991 (then called Membership Miles), and it became the largest card-based rewards program in the world by 2001.
New Technologies: Mini, Mobile, and Contactless Payments
After the turn of the century, credit cards kept evolving, especially the technology behind them.
Starting in 2002 with Bank of America, a new “mini card” fad began, as some issuers rolled out keychain-sized versions of traditional cards. The Discover 2GO credit card was a kidney-shaped card that fit into a keychain case and made Time’s Top 10 Everything 2002 list.
Mastercard’s tiny SideCard was released in 2003 and also incorporated new technology that allowed cardholders to simply hover the card over contactless payment terminals and just like that, transaction complete. More recently, wearables, such as watches, wristbands, and even rings, have entered the contactless credit card payment space, too.
Mobile wallets emerged in 2008, shortly after the dawn of smartphones when Apple opened their App Store. In May 2011 Google Wallet led the way for apps that stored payment card information for use in place of a physical card.
With little bank and retailer participation at first, Google Wallet and competitors such as CurrentC and Softcard struggled to earn consumer adoption. Apple Pay launched in October 2014 with 220,000 merchants ready to accept wallet payments at launch. Mobile wallet adoption has been slow in the U.S. so far, but is expected to ramp up in the coming years. Approximately 55 million people made mobile payments in 2018 and that number is expected to reach at least 60 million by the end of 2019.
The CARD Act of 2009: Additional Regulations
The Credit Card Accountability Responsibility and Disclosure Act of 2009, also known as the CARD Act, was signed into law on May 22, 2009 by President Barack Obama and represented a sweeping attempt to crack down further on harmful card issuer practices.
The CARD Act has reduced credit card costs to consumers by more than $100 billion over the past decade, which is one of its more significant impacts. The law, which is enforced by the Consumer Financial Protection Bureau (CFPB), offers several consumer protections:
- Cost savings: Limits surprise interest rate increases, caps late fees, and requires more consistent billing practices.
- Statement clarifications: Requires that credit card statements must clearly state penalty disclosures such as due dates, late fees, and penalty APRs, and note how long it will take consumers to pay down their balances by only making minimum payments.
- Limits young adult marketing: Prohibits issuers from luring potential applicants with enticing freebies on or near college campuses. It also tightened applicant age restrictions.
Following the CARD Act, the Dodd-Frank Wall Street Reform and Consumer-Protection Act was signed into law on July 21, 2010, which further ensures consumers aren’t overcharged for the use of credit cards. The law also tightened card access following the Great Recession, when many consumers were drowning in credit card debt.
Security Concerns and Solutions
Do you remember the infamous Target data breach? A December 2013 announcement confirmed that more than 40 million credit and debit account numbers had been stolen from Target’s payment database, and it was just one of many credit card security breaches to make headlines in a short period of time.
In addition to data hackers, card skimmers have also taken advantage of credit card payment technology. By copying the card information stored in the magnetic stripes of credit cards, skimmers can replicate cards and quickly rack up all sorts of fraud charges. Self-serve gas pumps and ATMs have been the most vulnerable to these security attacks, so much so that the U.S. Secret Service have cracked down on gas pump skimmers.
While cardholders faced these mounting security issues, the U.S. began adopting EMV payment technology to encrypt payment information and combat counterfeit credit card fraud. The process started in 2011 and the official nationwide shift occurred October 1, 2015.
EMV payment technology uses an encrypted smart chip instead of a magnetic stripe to hold account data and complete payments. Today nearly all credit cards sport silver EMV chips and consumers are adjusting to a new payment process at store registers: inserting cards instead of swiping them.
Magnetic stripes are still on the backs of most credit cards just in case a retailer can’t accept chip cards, but the goal is for the U.S. to migrate away from magnetic stripe payments entirely to better secure payments at registers, gas pumps and ATMs.
Credit Cards Today
There’s a more diverse selection of credit cards in the U.S. than ever before, as issuers offer cards with everything from travel rewards that entice big spenders to secured cards that help others build credit. More than half of all payments made each year are made via credit card, according to the Federal Reserve. In 2017, 40.8 billion credit card transactions worth $3.6 trillion were made, which is nearly 10% more than the prior year. Credit card debt totaled $1.029 trillion in March 2019, too.
While the idea of credit cards isn’t going away, the physical cards might soon become just another part of history. In addition to an increased adoption of mobile wallets, industry predictions point to biometric payments—the use of selfies, fingerprints, and retina scans to verify the account holder—as the next big step for credit card payments. We can already unlock our phones just by looking at them, after all. Maybe soon instead of reaching for our credit cards to pay for our lattes, we will reach to remove our sunglasses.